devilmaycare,sorry mate, don't know enough about the business...

devilmaycare,

sorry mate, don't know enough about the business model to comment on it. I'm only going by what Eddy Groves said about the business last year. He thinks ROE is low right now because they're in a growth phase. Once they settle down the returns will start return to its former high percentages. Sounds good to me.

centro2008,

Yes, that is the rule of thumb, but that's only because most equity raised comes from outside investors, such as a placement. When the share price is booming and you sell off a bit of your company to others, chances are you'll do well. If the share price comes off the boil shareholders will have effectively "scalped" the external investors.

When the share price is depressed though, and you sell off part of the company to outside investors, the reverse happens. When the share price recovers the outside investors have got in cheap and scalped you instead.

That's why if you think the share price undervalues the company, and the company requires cash for whatever reason it is better to raise it from its current owners, rather than to introduce new ones in.

Responsible management will do this. I recall last year Saracen Mining NL had actually planned to do a placement to raise cash, but as the share price drifted over the next few months, they cancelled it and announced a rights issue instead. Reason given: they didn't want to disadvantage shareholders by selling cheap to outside investors.

In your example, yes, a doubling of shares on issue due to a rights issue will reduce EPS. But the company also receives a large amount of cash from the proceeds, to do whatever it wishes. The fall in EPS is offset by the increase in money it gets. The share value does not change.

It is not easy to shake off the intuitive perception that rights issues are a share raising and being done at a low price is bad for holders. But they really are an effective way for the company to access capital in certain circumstances. I'm sure there'll be more explanations forthcoming both in the press and from the company if we do see a rights issue.